PAPER
Facing the Crisis
Boris Kagarlitsky - TNI Fellow
Paper presented at the Global Crisis Seminar, TNI, Amsterdam,
17-18 February 2002
The first years of the twenty-first century are not bearing out the hopes
of the global elites. As is often the case, the pompous ceremonies
have been followed by major setbacks. A warning that should have
been heeded was the Asian crisis of 1997-98, the consequences of
which were overcome only at vast cost. Ideologues and journalists,
however, reassured the world with references to the peculiarities of
the "new economy" that had triumphed in the late twentieth century in
the US and Western Europe. According to this theory, we have entered
a new phase of history in which the main factor of development is
becoming a talent for innovation which in theory is organically present
in Western culture. The Asian countries, oriented toward industrial
production, are held to be simply incapable of entering this beautiful
new world. "Globalisation" has become not just the slogan of the day,
but also the justification for all sorts of outrages, occurring before the
gaze of all and sundry. Opponents of the system have been branded
as dinosaurs or luddites resisting technological progress. Everything
would have been marvellous had a new bout of the crisis not struck
exactly where the prevailing theory maintained such reverses were
impossible by definition: in the most developed country, America, and
in the most progressive sector, that of information technology.
Finances and Computers
The mainstream explanation of globalisation holds that new
technologies have allowed an unprecedented mobility of capital. With
one press of a button, we are told, vast sums of money can be
dispatched in any direction. From this, naturally, the conclusion is
drawn that we have entered a quite new epoch, when control over the
movement of capital is becoming technically impossible, and when
the national state is also losing much of its influence as a result.
The problem with this "technological" explanation is that it actually
explains nothing. Even a brief glance at the question shows that the
liberalization of capital markets began long before the appearance of
personal computers or the internet. The first steps in this direction
were taken by the Nixon administration in the 1970s, followed by still
more decisive moves under Reagan and Thatcher in the early 1980s.
In the countries of Latin America the liberalisation of investment
markets and the transnationalisation of capital also became the
dominant tendency in the 1970s. On the other hand, the speed with
which information is transmitted does not in the least indicate that the
possibilities for financial control have weakened; quite the reverse.
The same mechanisms that can be used to shift capital can also be
used to detect this process. The key question has never been the
technical possibility of exporting money - European countries were
combating the illegal export of silver as early as the seventeenth
century - but the ability of the state to expose breaches after the event,
and to punish the guilty. The paradox is that with electronic
transactions, the state is theoretically able to obtain
one-hundred-percent-complete information on what is occurring, and
the legal financial market can thus be controlled without difficulty. The
accounts of "guilty" parties can be blocked automatically. In the 1980s
and 1990s all countries liberalized their financial markets to one
degree or another. It is significant, however, that the countries of
Scandinavia, which had been less consistent in carrying out this
liberalisation, did not encounter more massive violations than
countries which had adhered to a more "orthodox" market approach.
It was not technology that gave birth to the mobility of capital, but the
mobility of capital that sharply increased the demand for the
introduction of new technology. The globalisation that took place
during the 1980s and 1990s represented the victory of financial over
industrial capital. By the mid-1990s, a bloc had been consolidated on
this basis between financial capital, the energy corporations, and
high-tech firms. The representatives of financial capital were trying to
lower inflation to the maximum extent possible, even at the cost of
reducing economic growth.
The mobility of capital has become a vital principle. Trade can be
conducted on a world scale, information knows no borders, and even
in ancient times money travelled about the globe. Production, by
contrast, ties capital down, fixing it to a particular spot.
The history of capitalism includes periodic shifts in the relationship of
forces between commercial-financial and industrial capital. As a rule,
the periods that have seen a marked development of
commercial-financial capitalism have also been epochs of political
reaction. During these times, the state has played the role above all of
a military and police instrument of the ruling class. Transport and
communications have developed more rapidly than industry. The
ideology of free trade has been dominant. This was the situation that
applied, for example, in the first half of the nineteenth century, when
the industrial revolution had not yet developed to its full extent.
The late twentieth century witnessed the same triumph of finance
capital. The new technologies were meant to service the economy that
was being established, and the corresponding sector of business
thus entered readily into an alliance with the ruling group, embracing
its ideology. In their turn, the new technologies became attractive to
finance capital. In the high-tech sector, rapid growth combined with
small investments created the ideal preconditions for a speculative
boom. The growth of stock market quotations (the American NASDAQ
index) in practice amounted to a redistribution of wealth between the
"traditional" and "new" sectors of the economy. Industrial capital found
this situation acceptable so long as the economy as a whole, and
corporate profts along with it, continued to expand. The industrial
capitalists made up for their losses by shifting their production to
countries with cheap labour power, and by intensifying exploitation. In
the process, however, the entire model of consumer society that had
grown up since the Second World War came under threat.
In the epoch of classical capitalism the main consumers were the
upper and middle classes, including the urban and rural petty
bourgeoisie. The proletariat was the main producer, but its labour
power had to be as cheap as possible in order to ensure that cheap
products were supplied to the market. By virtue of this, workers were
worth little to the capitalists in the role of consumers.
With the advent of "Fordism" and the Keynesian model of capitalism,
everything changed. Henry Ford declared that his workers themselves
would have to buy his cars. The new rules of the game meant that on
the scale of the economy as a whole, high wages were to the
advantage of entrepreneurs. It was another matter entirely that
whoever went down this road first lost in terms of competitiveness.
State regulation was therefore needed to ensure that the whole
capitalist class made concessions to all the workers simultaneously.
Compensating for the drawbacks of this model was the possibility of
using cheap raw materials and of exporting products to markets in the
Third World.
The new model not only required a massive shift of industry to poorer
countries, but by condemning workers in the West to take part in a
"race to the bottom", placed consumer society under effective threat.
The gap between consumption and industrial production on a world
scale has brought us back to the model of classical capitalism. The
new equilibrium can be sustained only while the middle layers remain
relatively numerous, and the growth of their incomes ensures that
consumer demand is pumped steadily through the market
mechanisms. Inevitably, however, consumer society and the middle
class will gradually be eroded. The less stable the position of the
working population as a whole, the more vulnerable will be the
white-collar layers and the labour aristocracy. For a certain time this
trend may be counteracted by two factors: the growth of new
technologies, creating well-paid jobs in a few "fashionable" sectors,
and increases in the debts owed by the middle layers, who can no
longer permit themselves their accustomed standard of living, but
cannot renounce it either.
The sectors of high technology and finance fostered the rise of new
middle layers so long as they themselves were expanding.
Nevertheless, the potential for growth in these sectors is very limited.
These limitations, moreover, are not of a technological character. The
high-tech sector expanded due to demand for its products from the
rapidly growing commercial-financial sector. This sector, however, is
not the sole - and in essence, not the ideal - source of demand for the
high-tech sphere; in the 1960s and 1970s, for example, the main
customer for this sector was the state. The present alliance is thus
tactical and conjunctural.
The Crisis of Desynchronisation
The rate at which information can be transmitted has risen
dramatically, but this does not mean that the processes this
information is supposed to describe have accelerated at the same
rate. Furthermore, the mechanisms through which decisions are
taken, and the speed with which the decision-making process
operates, did not change rapidly during the 1990s. In a certain sense,
the abundance of information which has become available thanks to
the new technologies has even created new problems. If information
is forever being transmitted faster and in greater volumes, while the
changes in the area of production are not occurring as quickly, the
widening gap is filling up with pseudo-information, with "noise".
Technical devices that were originally created to make management
easier have themselves become a source of problems. In March 2001
the Financial Times published a survey showing that company
managers were swamped with work. "The average US office worker is
spending almost half a day digesting and sending messages by
telephone or e-mail," the newspaper noted. Far worse is the fact that a
significant part of this work is quite pointless: "Sixty per cent of the
white-collar workers surveyed felt overwhelmed by the amount of
information they receive each day." As a result, they are observed to be
suffering from "information fatigue syndrome" and "attention deficits",
as a result of which genuinely valuable messages are lost in the
mass of secondary and unnecessary ones (Financial Times, 30
March 2001, Recruitment, p. 11). Ultimately, the quality of
management declines. The reason for this does not lie in the advent
of new technologies as such, but in the fact that their development has
been divorced from the needs of the real economy. The channels of
information have become loss-making so far as the volume of
pertinent information generated by people's social existence is
concerned. Mobile financial capital has been able to make maximum
use of the advantages of the new technologies, which is not
surprising, since this capital has been the main customer for the
innovations of the high-tech sector. The problem, however, is that the
more rapid the turnover of financial capital has become, the greater
the gap between stock market speculations and the processes taking
place in the "real sector".
Production takes time. After the initial investments have been made,
time is needed for new means of production to be assimilated. First
buildings have to be constructed; only then can equipment be
purchased and installed, and only after this can workers be hired.
Goods on sale also have to find purchasers, which needs a certain
time. Meanwhile, the speculative market promises instant profits. The
rate of turnover of capital is greater here by whole orders of
magnitude, and in this regard, speculation is far more attractive.
It is another matter entirely that funds have to be invested in real
companies. Fictitious capital cannot exist without some real, working
economy. As noted earlier, speculative capital has found high-tech
companies attractive in this regard precisely because these
companies require little in the way of initial investment, and the
turnover of funds is rapid. The combination of speculative capital and
high technology created the effect of the "new economy", which lay
behind the explosive increase of stock prices first in the US and then
throughout the world.
These peculiarities of the financial market led inevitably to the
desynchronisation of investment processes in various sectors. As
always happens in the market, the sectors that promised less in the
way of profit suffered a shortage of investment. Unlike the situation in
"classical capitalism", however, investment flowed not only to the
sectors where profits were higher, but also to those from which money
could be extracted more quickly. In this respect even a highly profitable
productive enterprise lost out to a thoroughly dubious - and from the
point of view of the real economy, quite senseless - stock-market
operation. Trillions of dollars were withdrawn from the real economy to
be put in circulation on the stock market. The industrial sector had
thus to bear a double burden: it had to ensure the profitability of
enterprises, and at the same time subsidise an orgy of financial
speculation. The result was an inevitable shortage of capital
investment in industry, a situation which had particularly dire effects in
the Third World, and also in Russia and a few other countries of
Eastern Europe. Meanwhile the countries of East Asia, which were
protecting their capital markets and hence did not experience a
shortage of investment, encountered the opposite problem. The
maturing crisis of consumer society limited demand for their goods.
By the late 1990s East Asia was stricken by a classic crisis of
overproduction, at the same time as other parts of the world lacked
funds for modernising industry, and wages were falling.
For a time, the slowing of industrial growth in the midst of a
speculative bacchanalia of financial capital could be concealed
behind the illusion of a "technological revolution". The new
technologies were supposed to be an adequate source of growth in
and of themselves. What actually happened was that in a context of
increasing world-wide problems for industry, the technological
revolution itself started to get bogged down.
Liberal theory assumes that processes occurring in parallel will be
synchronised spontaneously by the market mechanism. In principle,
the liberals are right. But one should not forget that there is little joy for
entrepreneurs in the means through which the market resolves the
dilemma - a global economic crisis.
The End of High Profits
The phase of expansion that lasted from 1992 to 2000 was not only
among the most prolonged in the history of capitalism. This period
was also remarkable for high profits and the rapid growth of stock
prices, against a background of economic growth that was nowhere
near so robust. Marx noted the tendency, inherent to capitalism, for the
rate of profit to decline. On the whole, history bears out this
conclusion, but there are certain periods when profits start growing
rapidly, and when economists join in asserting that Marx was wrong or
that his conclusions have become obsolete. The reason for this
paradox is that the structure of a capitalist economy is not unchanging.
New sectors and new markets rise up. Profit rates in these areas are
at first extremely high, and it is only later that they start to decline in
accordance with the general principles inherent to the system. These
new sectors and markets serve to sharply increase the average rate of
profit across the capitalist system as a whole.
The 1990s saw both the rapid growth of new sectors - this was the
period when the infrastructure of the "information society" was set in
place - and at the same time, the assimilation by capital of "new
markets". What was involved in this case was not only the installing of
a neo-liberal economic regime in the countries of the former
"communist bloc" and "third world", but also the "marketisation" of a
whole series of areas of life in the West that had earlier been excluded
from the sphere of market relations. Health, education, public
transport, and so forth were placed on a commercial basis. The need
to increase profits by appropriating new sectors also explains the
irresistible desire of neoliberal decision makers to implant private
enterprise in ever new areas of life (this was the reason why, for
example, the General Agreement on Trade and Services (GATS) was
drawn up in 2000-2001).
Market cycles are subject to the same laws as profits. As new sectors
and markets arise, their own cycles form within them; these may not
coincide with the cycles of the "old" markets and sectors. Hence in
Eastern Europe the transition to capitalism was accompanied by
prolonged depression which gave way to economic growth only in the
late 1990s, when the potential for growth in the West was already
petering out. This was particularly obvious in the case of Russia,
where output began to increase only in 1999-2000, after the Asian
economic crisis had already shown that the period of world-wide
expansion was nearing its end.
For capitalism, the unevenness of development between sectors and
countries is both a cause of growth and a cause of destabilisation. In
the open world economy of the 1990s, the US became a sort of
magnet attracting capital from the entire world. This was due not so
much to the exceptional dynamism of the American economy, as
described by popular journalism, as to the exceptional position
occupied by the US in the world system. It was not simply that the US
represented an enormous market, and that the US dollar acted as the
world currency. The more open the economies of other countries, the
greater became the flow of capital into the US. The larger the
American capital market, the more attractive it was to investors. By
drawing capital out of other parts of the world, the US destabilised the
situation in these regions, but at the same time the growth of the US
economy acted as a sort of shock-absorber, staving off a world
depression. "This tremendous inflow of foreign capital - two or three
hundred billion dollars a year for the last several years - has helped
propel our expanding economy," noted Doug Henwood. "That's kept
markets rising; it has kept consumers being able to spend beyond
their means."
In the conditions of the "open economy", the depression in the
countries of Eastern Europe and a number of third world states simply
aided the transfer of funds, and helped buoy up the growth in the US:
"Certainly Russian flight capital has injected a lot of cash; a lot of cash
came out of Asia, Latin America, Eastern Europe, and the former
Soviet Union and came to the United States' stock markets. All these
calamities have produced wonderful results for the American ruling
class." (Monthly Review, April 2001, v. 52, no. 11, pp. 77-78).
Just as the "emerging markets" of Eastern Europe and the third world
pumped in extra capital to sustain growth in the US and to some
degree in the European Union, the rapid development of new
information sectors in the West supported and prolonged the general
growth. From this, theoreticians of the "information society" promptly
drew the absurd conclusion that the technological revolution would
guarantee us uninterrupted growth. In reality, the "information
economy" was subject to the same market cycles as the traditional
economy, but in this case the cycles operated with a certain delay.
After the potential for expansion in these sectors was exhausted, the
"new economy" itself became a decisive factor in the downturn.
The increase in profits also had another, perfectly traditional reason:
intensified exploitation of workers. The Wall Street Journal discussed
this quite openly: "Corporate profits over the long term can only grow
as fast as the economy feeding them, unless companies find ways to
pay their workers less, charge their customers more, or increase
profits abroad." Ultimately, the newspaper noted, "much of the profit
gains came from the workers' pockets, and that can't last."
Companies transferred production to countries with cheap labour
power, and smashed the resistance of trade unions in the West, but
by the late 1990s they had "stretched their labour gains about as far
as they [could] go." (The Wall Street Journal, 17 April 2001, p. A10).
As Karl Marx explained, a "race to the bottom" imposed on workers by
the bourgeoisie has its limits. If the cost of labour power falls without
interruption, the proletarians will sooner or later be transformed into
paupers whom the bourgeoisie will itself be forced to feed, instead of
feeding at their expense. Under conditions of crisis, the natural
reaction of entrepreneurs is once again to cut their costs at the
expense of the workers. But this is precisely what employers were
doing throughout the entire period of upturn, and the opportunities
available to firms are now practically exhausted. Moreover, contrary to
the usual scenarios, a crisis at least in its early stages may be
accompanied by an increase in the pressure exerted by workers on
management.
Ultimately, the eight-year economic expansion created the conditions
for a new rise of the workers' movement, which gradually started
winning back the positions it had lost. This meant that the resources
available to corporations for increasing their profitability were
exhausted. Early in 2001 company profits were still relatively high, but
a tendency for them to decline had become obvious.
Throughout the decade, the increase in stock prices substantially
exceeded the growth of profits, but so long as profits also grew
noticeably this was not of great importance. From the moment when
profits began to fall, maintaining the stock market bubble became
impossible.
The Oil Crisis
During periods of economic growth, raw materials prices grow. This
could not fail to have an effect on oil prices. The shock of the Asian
economic crisis drove down prices for oil, but the revival of production
in Asia caused them to rise dramatically. When oil prices began
increasing in the autumn of 1999, it seemed quite natural to expect
that a sharp rise would be followed by a fall in demand and by
stabilisation of the market, after which prices would decline. Fuel
prices always fall in spring and summer; therefore, the same would
happen this time as well. Moreover, oil producers themselves were
taking fright at the excessively rapid rise in fuel prices, and had begun
raising their output. The market, however, seemed to have run wild. To
the increase in supply, it reacted with an even greater rise in prices.
The point was that the oil market was only part of the world economy.
Over some fifteen eyars, vast sums had been taken out of the "real
economy" throughout the world, and had moved over into the sphere
of financial speculation. In this case Russia was no exception, and
indeed, was in the front ranks, moving in the same direction as the
US. Monetarist economists had convinced the world that the only
sources of inflation were state spending and the printing of paper
money. Meanwhile, the rapid rise of share prices in the US, at the
same time as almost all central banks were applying harsh policies,
led to a curious form of inflation in which paper money was not
devalued, but speculative financial capital grew at a rate totally out of
step with the increase of production. The economies of the West
came to feature a sort of "inflationary overhang". This "superfluous"
money eventually burst onto the oil market. The inflationary potential
accumulated in the Western economies could not be realised due to
the harsh policies of the central banks, but as time passed, the
greater this potential became. All that was needed was for some
channel to appear, and this excess money would burst onto the
market. After the Organisation of Petroleum Exporting Countries had
reviewed the situation and sharply reduced quotas, oil prices leapt
upward.
Under the pressure of the new oil prices, the financial "overhang"
collapsed, and inflation was destined sooner or later to fly out of
control, with the "superfluous" money breaking free and spreading
throughout all sectors of the world economy. It is one of the ironies of
history that the first oil shock, in 1973, disorganised the system of
state regulation and undermined the "socialism of redistribution" that
held sway in the West; by contrast, the second oil shock is
disorganising the system of market-corporative regulation, and is
striking a blow against neo-liberal capitalism. If the response to the oil
shock of 1973 was a shift - even if after a certain delay - of the world
economy to the right, to a liberal model, this time the most probable
response (also after a certain pause) will be an analogous movement
to the left. The wheel has turned full circle.
For oil exporting countries, including Russia, the growth of energy
prices meant not only an unexpected windfall, but also the opportunity
to maintain the illusion of economic success without serious
structural reforms. Neither in Russia, nor in the Arab countries, nor in
Mexico was the influx of petrodollars accompanied by attempts to
implement serious investment programs. As in the aftermath of the
1973 oil shock, the money began returning to Western banks,
increasing the inflationary pressure on the world economy as a whole.
In 2000 the economy of post-Soviet Russia underwent record growth
of 7 per cent after almost a decade of depression. The same year,
however, also saw a dramatic rise in capital flight to the West.
The structural problems of the oligarchic economies in the countries
of the periphery prevented effective use of the flood of petrodollars, but
as in the 1970s, the influx of money stimulated the political
irresponsibility of the elites. In the 1970s the oil boom culminated in a
series of political crises and catastrophes in countries that had
gained from the new energy prices; the culmination of these
processes was the Iranian revolution. The new oil boom created the
preconditions for similar political cataclysms, above all in Russia.
The Riddle of the American Middle Class
Until 2000, the US economy benefited more than any other from the
established rules of the game, and at the same time remained the
principal stabilising factor for the world system. With the beginning of
the new century, however, the situation changed radically. Not only did
the American market cease to be capable of extinguishing the
tendency to crisis that had built up on a world scale, but it became the
very source of the problem.
If the rapid growth of stock prices and the swelling of the financial
"bubble" in the US in the 1990s did not escape the attention of
economists, the increasing indebtedness of the American middle
class was not viewed as a cause for special alarm. Still less were the
accumulating debts of middle-class households and the growth of the
US financial bubble linked in mass consciousness. Meanwhile, these
two processes were not just closely interconnected, but fed on one
another. The expansion of financial capital could not fail to be
accompanied by a rapid development of the credit market. This was
aided both by the spread of new technologies - from smart cards to
online banking - which made credit more accessible, and by the
general market conjuncture. In addition, the financial corporations
themselves consistently followed a policy aimed at attracting
ever-growing sections of the population to their service zone. By the
late 1990s the American middle class was enmeshed in debts.
Occurring against a background of overall economic growth, the
increase of indebtedness did not in itself arouse alarm so long as it
was accompanied by a growth of money incomes. Whether the
incomes rose faster or more slowly than the debts was not crucially
important. If they rose more slowly, this nevertheless allowed the
positive dynamic to be maintained up to a certain point. If they rose
faster, this led in practice not to a reduction of indebtedness, but to a
still greater increase, since the growth of incomes made access to
credit easier, and increased people's borrowing capacity. Beginning in
the first half of the 1980s, when the neo-liberal model triumphed
definitively in the United States, debts - private, state and corporative -
began growing rapidly. During the Clinton "expansion" period, the
increase in indebtedness accelerated still further. Consumer debt
exceeded one and a half trillion dollars. In 2000, outstanding
mortgage debt exceeded $6.8 trillion, after more than doubling during
the 1990s. Meanwhile, private debt in the US continually exceeded the
state debt ($5.62 trillion in 2000), which went on growing despite the
favourable conjuncture and the budget surplus (Economic Report of
the President, 2001. US Government, Washington DC, 2001). The
combined state and private debt in 2001 reached $13.5 trillion.
It is not hard to see that the growth of the stock-market pyramid was
accompanied by a similar growth of the debt pyramid. These two
processes mirrored and supported one another. Both pyramids
represented fictitious capital in two of its various forms. Just as
shares cannot be sold in their total volume without an immediate fall
in their price, a sudden, dramatic reduction in debt levels would
provoke a crisis of the banking institutions. The pyramids, however,
could not continue growing indefinitely.
On the social level, it was as though the two mirror-image pyramids
were superimposed on one another. This reflects the structure of the
American middle class, whose members were at the same time
sinking ever deeper into debt, and being drawn increasingly into
playing the stock market, which according to the prevailing theory
should have provided them with the funds to service and pay off their
borrowings. Meanwhile, the middle class could be divided into three
groups: an elite who did not have burdensome debt commitments,
and who actively played the stock market; a bottom layer who were
heavily in debt and were incapable of playing the stock market; and a
middle group who accumulated debts and stocks simultaneously.
The same applies to many of the small and medium companies who
became increasingly dependent on external sources of financing, and
also on stock-market prices. The rise in share prices allowed them to
draw on new credits, and so forth. While the trade was conducted to a
significant degree on credit, the taxes were paid into the budget in real
money; this ensured the famous surplus of which the Clinton
administration was so proud.
Such a situation could not continue indefinitely. Beginning in
2000-2001, both the debt and stock-market pyramids could not fail to
be hit by crisis. The stock-market pyramid was able to correct itself
spontaneously, burying the hopes of important parts of the middle
class beneath its debris. The debts of private individuals, however,
could be written off only through the goodwill of creditors. The
American middle class finished up in a situation that in many ways
recalled that of the more developed countries of the Third World; it was
now unable to pay off its debts, and there was no chance the debts
would be forgiven. There remained only one mechanism through
which the problem could be resolved: inflation.
Euro-Ambitions
Financial capital in the US was able to exploit the specific advantages
of the dollar. At the same time a national currency and a world-wide
monetary unit, the dollar attracted investors; the surplus mass of
dollars spread throughout the world, lowering the risk of inflation in the
US, and in the process making the dollar even more attractive. The
European finance markets lacked such advantages. It is this, and not
an imaginary lag by Europe in the development of advanced
technologies, which explains the fact that the "new economy" has not
developed as rapidly on the eastern side of the Atlantic. Stock prices
rose, but not at the same rate as in the US. For one thing, European
companies could not build a financial pyramid since they did not have
the financial resources to maintain it, and for another, it was
impossible to expand the indebtedness of companies and the
population to the same extent as in the US. In principle, this could be
regarded as a sign of healthier and more stable development, but
from the point of view of the finance capital which held sway in Europe
just as in America, it represented the main problem, the source of the
weakness of the European economy. The ambitious project of
introducing a single currency, a project undertaken by the ruling
classes of the European Union in the late 1990s, amounted to an
attempt to even up the situation and attract speculative capital to the
European financial markets.
Becoming a second or alternative world currency, the euro was meant
to equalise the chances for competitors, thus infecting the European
economy with all the maladies afflicting the US. The population
spontaneously sensed the threat and put up resistance, but the
mainstream press and politicians, naturally, put this down to
"conservatism" and the emotional or cultural attachment of Europeans
to their old national currencies.
The project of the euro was as ambitious as it was adventurous, and
most importantly, very badly thought-out. In the late 1990s the
leadership of the European Union imposed common rules on all the
member countries, rules that presumed a lowering of inflation to a
uniform level of less than 3 per cent. What followed had the character
of a one-off campaign, in the best Soviet tradition, with the countries
rushing to report on time the results they had achieved.
The trouble was that in such circumstances, a uniform rate of inflation
is impossible unless all the other parameters of economic
development are equalised. Unless there is a policy of redistribution,
in fact, market disproportions tend to increase. The European Union
adopted some redistributive measures, but the leaders, in line with
their common neo-liberal ideology, put their stake on the elemental
forces of the market. Paradoxically, it was this which undermined the
chances of a stable future for the euro.
With the help of administrative and political pressure, inflation was
lowered simultaneously in all the countries involved. Then it started
growing with still greater force in those countries which had artificially
reduced its level for the sake of entering the euro-zone. Only now, this
was no longer a problem of one or another particular country, but a
destabilising factor for the entire European project. The euro was
supposed to replace the national currencies on 1 January 2002. It
would have been hard to imagine a less opportune moment. By the
time the new currency was supposed to enter circulation, the world
and European economies were already in recession. This meant that
supporting growth, or even mitigating the crisis, required a lowering of
central bank interest rates. But this was something the European
Union could not permit itself without at the same time dashing the
hopes of turning the euro into a real rival to the dollar - that is, without
defeating the whole purpose of the project. Still worse, the various
countries entered the crisis in different condition. Effective
management of the situation required fundamentally different
approaches in Germany, in Scandinavia, and in the countries of
southern Europe. This, however, proved technically impossible. The
single European Central Bank had been established precisely in
order to implement a common policy. Assembling ships into a single
convoy requires the observance of definite rules. The whole convoy
has to move at the speed of the slowest ship. If this rule is not
followed, the remaining ships fall behind, and the convoy is
dispersed.
The paradox was that the European Union could not allow itself to
slow down and keep to a single rhythm of movement. The countries of
southern Europe could not keep pace with Germany. The transition to
a single currency coincided with the process of integration into the
European Union of the countries of the former Eastern Bloc; the Czech
Republic, Poland and Hungary already stood in the first rank,
expecting a final decision. However, there was not the slightest hope
that the newcomers would manage to cope in the long term with tasks
which even countries that had been integrated into the European
Union for many years were finding beyond them. The European
"convoy" was becoming even more heterogeneous.
In the spring of 2001 the European Central Bank again refused to
lower its interest rates, so affirming its commitment to a strong euro -
at any price. The trouble was that this price might well become the
destruction of the common economic space, and ultimately, the
collapse of the euro. The sole hope for the European project was that
the crisis would bring about a spontaneous fall in the price of the
dollar, and inflation in the US. This, however, did not portend a happy
future for the euro either. The European Central Bank would be able to
lower interest rates and unleash inflation, thus slowing the convoy and
allowing the laggards to catch up, but this would be very remote from
the original ambitious plans of the European elites. Instead of nearing
their strategic goals, they would now have to concentrate exclusively
on minimising the damage caused by their own past decisions.
Political Dilemma
History records numerous cases of the debt enslavement of free
producers occupying a "middle position" in the economic hierarchies
of their societies. Examples range from the peasantry of ancient
Rome to the European petty bourgeoisie and elements of the white
settlers in Caribbean America in the seventeenth century. On this
level, the drama experienced by the US middle classes at the
beginning of the twenty-first century is far from unique. From ancient
times, such debt crises have been accompanied by a sharp rise in
social tensions, and by the appearance of populist movements. How
events have developed subsequently has depended on the
relationship of political forces. If the populist movements have been
defeated, the middle layers have lost their status, independence,
property, and at times even their freedom, being turned into slaves or
proletarians. If, on the other hand, the movements have been
victorious, finance capital has not only had to accept huge losses, but
has also lost a good deal of its influence in society. Precisely the
same kind of struggle will inevitably break out in the countries of the
West. At first it will probably take the form of battles around the
question of inflation.
During the period when they were both growing, the "higher"
(stock-market) and "lower" (debt) pyramids counterbalanced one
another. The collapse of the stock-market pyramid destabilised its
debt counterpart, altering the relationship of forces and moods in
society. Not only do important elements of the middle layers have an
objective interest in inflation as the ultimate means of reducing the
debt burden, but the conjunctural union between finance capital and
the high-tech sector is also disintegrating. During the period of high
stock market prices, the high-tech sector saw finance capital as the
locomotive of development; now, it sees finance capital as the source
of its problems. In turn, finance capital is trying to make up for its
losses by beating debt payments out of the high-tech sector. A
characteristic feature of the "new economy" was the combination of
relatively low wages with the opportunity to participate in profits
through taking up stock options. The collapse of the stock market
pyramid has meant that the link between workers and the real owners
of the enterprises has been weakened; white-collar employees who
had felt almost as though they owned the firms where they worked
have been placed in the position of proletarians - if they have kept their
jobs at all. The "new economy", in sum, has turned out to be doomed
to the same class conflict as the old one. Workers are starting to need
pay increases, and to understand the reasons for the existence of
trade unions.
Not only are finance capital and its last reliable ally, the energy
industry, being forced to beat off attacks from more and more
opponents, but objective inflationary pressures are increasing. Since
the second oil shock freed up surplus financial resources and threw
them onto the market, governments have been faced with a dilemma:
whether to reconcile themselves to inflation and to try to manage it, or
to resist it to the last, while encountering growing discontent in
formerly loyal sectors of the population. Winning this fight is
impossible, but to admit as much would mean a fundamental break
with the neo-liberal model and with the groups within finance capital
who have dictated the policy course of governments, irrespective of
their party persuasion, throughout the past decade.
Trap
Even if the ruling groups were prepared to make a change of course,
doing this is virtually impossible for them. During the 1990s they drove
themselves into an institutional trap which they could well find fatal.
The key principle of the neo-liberal "reforms", on both a global and
national level, is that they are supposed to be irreversible. This means
that once the structures, rules and relationships have been set in
place, it is impossible in principle to make corrections to them. The
system does not have a reverse gear. Not a single one of the
international documents of the neo-liberals specifies procedures for
overturning decisions that have been taken, or for allowing individual
countries to opt out of an agreement. Once abolished, mechanisms of
regulation cannot be restored as a matter of principle. It is not enough
that regulation should have been outlawed (paradoxically, at precisely
the time when the capitalist class has more and more need of it); the
institutions themselves have been dismantled. Mechanically restoring
them is both impossible and pointless. The new level of development
of the market also requires new forms of regulation. The trouble is that
creating a new system of institutions from scratch is not just difficult,
but presumes a far greater level of radicalism, far more acute
conflicts, and most importantly, the destruction on a corresponding
scale of the neo-liberal order.
However much it might wish to do so, the bourgeoisie will not be able
to escape from this institutional trap without help from outside. Just as
in the 1930s, the only way this conflict can be resolved is through a
dramatic strengthening and radicalisation of the left. The crisis of the
early twentieth-first century is not simply the latest conjunctural decline
within the context of the "natural" market cycle. It is the result of
long-term processes unfolding within the capitalist economy over at
least two decades, and places in question the neo-liberal model that
has held sway throughout the current epoch. In other words, what is
involved is a clearly expressed crisis of the system. The twentieth
century saw at least two such crises, from 1929 to 1933 and in the
early 1970s. Both times, the crisis culminated with the installing of a
new model of capitalism (in the first instance, Keynesian, and in the
second, neo-liberal), but each time, the very existence of the system
was threatened. Although the main threat to the system both in
1929-1933 and in the 1970s came from the left, ultra-right forces rose
to prominence as well. During the years of the Great Depression
fascism came to power in Germany, and the fascist threat was quite
real in France. It is significant that it was during precisely this period
that the Stalin regime in the USSR took on its definitive totalitarian
shape. The repressions and the centralised, autarchic economy were
Stalin's answer to the crisis of the world market. The revolutionary
movements of the "red thirties" also failed, but the social democratic
reforms in Europe and the New Deal in the US changed the face of
capitalism until the beginning of the 1950s.
During the 1970s the left alternative was represented by the Chilean
and Portuguese revolutions. It seemed as though the radical
movements that had failed in 1968 were about to gain a second wind.
This, however, was the period when the neo-liberal model was put
into practice for the first time by military dictatorships in Latin America.
The defeat of the left, that had become obvious by the late 1970s,
sealed the outcome of the crisis.
This time the left might in theory gain its revenge. Historically, the left
has always played a dual role within the framework of capitalism. On
the one hand, it has fought for a qualitatively new society, for
socialism. On the other hand, it reformed capitalism, and thus, in
essence, saved it. This holds true not just for reformists, but also for
revolutionaries. Paradoxically, the one function of the left has been
impossible without the other. Reform required that the system be
subject to influences "from outside", in both the politico-social and
ideological senses. Without an alternative ideology, it would have
been impossible to formulate the new ideas which subsequently lay
at the basis of the reformist programs. The capitalist crisis of
1929-1933 culminated in widespread reform. The crisis of the 1970s
ended in a bourgeois counter-reformation. How will the crisis of
2001-2003 end? The inevitability of a return by the left to the centre
stage of politics is obvious, even from the point of view of the
long-term interests of the bourgeoisie itself, or at least, of a certain
sector of it. Meanwhile, those left parties and politicians who accepted
the rules of the game of the 1990s are becoming completely helpless
in the face of the crisis. They are unable to propose anything
meaningful to the working class, at the same time as they are no
longer capable of effectively serving the ruling elites. More radical
forces are moving to the forefront. What will they be able to propose?
Just as in earlier epochs, two currents are emerging within the left.
The members of one of these are striving to overcome capitalism; the
others, to improve it.
The Program of Transition
However things might turn out, the radicals and reformers have to
cover a certain distance along the road together. Unless some kind of
common program can be worked out, revolution will be just as
impossible as reform, since there is nothing so conducive to radical
change as the certainty that reforms will succeed. Reformism often
acts as a springboard for revolution, as happened in France in 1789
and in Russia in 1917. The drawing up of a common platform uniting
reformists and radicals does not signify by any means that this
platform has to be as moderate as possible. Quite the reverse, since
consistency and radicalism provide a guarantee of success in a world
with an acute need for new ideas. The movement that began in Seattle
in 1999 showed that anticapitalist protest is becoming a vital
necessity for millions of people not only in poor, but also in so-called
rich countries. As a result, what needs to be placed in the forefront is
not the moderate redistributive ideology of social democracy, but the
idea of public property. The task is not only to revive the public sector,
but also to radically transform it. Throughout the twentieth century,
socialists were divided into supporters of workers' self-management
and admirers of centralised planning, without either side recognising
that neither ideology would suffice for the main task of socialisation,
that is, placing the public sector at the service of all of society. It is now
possible to say that the public sector will only work if real social control
is guaranteed. This presupposes accountability and transparency on
a scale absolutely inconceivable to liberal economists. Economic
democracy has to be representative, and this means that not only the
state and workers, but also consumers and communities have to take
part in the formation of boards of management.
The things we can use only collectively have to belong to society as a
whole. This applies to energy, transport, extractive industries, utilities
and the communications infrastructure just as to science and
education. But a no less and perhaps even more fundamental
question is that of the socialisation of credit. Unless this is
implemented, even if only in part, it will be impossible to find a socially
acceptable solution to the world debt crisis.
Meanwhile, the separation of the private and public interest is
absolutely fundamental. If that had been in place during the years of
neo-liberal reform, the International Monetary Fund would not have
been able to use money obtained from the governments of the West to
make loans to the governments of the Third World and Eastern
Europe in exchange for the privatisation of property, that is, to play in
practice the role of a broker, and to exert political pressure in the
interest of private investors. Public credits, to the last kopeck, cent, lira
or penny have to go to the public sector, into projects aimed at carrying
out public tasks. The situation in which private commercial risks (and
losses) are socialised, while profits are privatised, is becoming
intolerable.
John Maynard Keynes wrote that the socialisation of investment was
the only socialist slogan that from his point of view was justified. The
main principle of socialism is control by society over the investment
process, not state ownership of buildings and machines. The left has
never been opposed to cooperatives or to municipal enterprises. On
the contrary, these are the forms of organisation of production that can
best reflect the needs of local polulations. They cannot, however, take
the place of public investments in projects intended to serve collective
needs. The public sector acts as the tool through which society
DIRECTLY fulfils its collective tasks, economic, social, ecological and
cultural. The market and the private sector are only suited to fulfilling
private tasks, and no amount of regulating can do away with this
contradiction. The more pressing the common tasks of all society and
all humanity, the greater the need for socialisation. In an epoch of
global warming, the socialisation of the energy industry is becoming a
question of the survival of humanity. And if socialism can operate in
this sphere, why not in others? If it can save us from world-wide
inundation, why should it not become the leading principle of our life
as a whole?
The answer to this and to many other questions will depend on the
development of the movement, on its successes and defeats, its
experience, its activists and leaders. It may be that radicals will not
attain their historic goals this time either. But one thing is obvious:
without the participation of radical forces, successful reform is
impossible.
Back to top TNI Home Search
---------------------- nti-Davos Gets Up Steam
Boris Kagarlitsky - TNI Fellow
The Moscow Times, 5 February 2002
The World Social Forum in Porto Alegre was conceived as an alternative to the Davos World Economic Forum. While Davos
has become a symbol of the globalization of markets, Porto Alegre was intended as a symbol both of resistance to this and of
progressive social reform. Those who demonstrated against the events of the global elite in Seattle, Prague and Quebec
came here to have an event of their own.
It signals the movement's coming-of-age and grew out of a need to go beyond protest and criticism to offer a vision of a better
world - a vision that should be inspiring and at the same time practical.
The choice of host city is far from accidental. For years Porto Alegre has been ruled by the Workers' Party of Brazil (PT), notably
by representatives of its left wing. The result has been the development of a model of municipal governance famous for its
"participatory budget system."
Representatives of different neighborhoods including impoverished working class favelas develop their own budget
proposals which initially have to face criticism not from financial experts but from the people living in other neighborhoods
who are competing for the same money. Consensus-building in these conditions becomes an important feature of daily life.
Usually it only takes a few minutes for the city council to vote on the final budget once it has passed the discussion phase in
the districts.
The first Porto Alegre Forum in 2001 brought together about 10,000 people. This year, it is estimated that 60,000 delegates
and guests are in attendance.
Ministers, members of parliament, mayors, and trade union officials have flocked to Porto Alegre along with the leaders of
popular movements, intellectuals and activists typically seen at the anti-globalization rallies of the past two years. The PT is
expected to win the next presidential election in Brazil and leading social democrats from around the world are using the
opportunity to take a closer look at the party which will probably soon be ruling the largest country in Latin America.
It is no surprise that the radical wing of the movement immediately called the Porto Alegre Forum a reformist event. Bringing
together different groups, it has had to work out a minimum, non-revolutionary consensus agenda.
The Porto Alegre Forum needs to prove that the left is making a comeback internationally, following the catastrophic decline of
the 1990s. The Forum is proof of the growing size and public influence, but social change cannot be effected by enthusiasm
alone. Concrete ideas and programs are needed.
2001 was dominated by declarations about "another world being possible." This year, following the crash in Argentina and
with the global recession a fact of life, one can expect the Forum to go somewhat further.
The key issue this year is capital controls. When the IMF and the World Bank were first established, their task was to protect
nations against the anarchy of global markets. But times change and the institutions designed to promote regulation have
become tools of financial deregulation.
Following the 1998 ruble crash and Argentinian disaster, even in the business community many now think that deregulation
and privatization have gone too far. However, it is not possible to simply return to the good old days. The mechanisms for
regulation have been dismantled over the past decade and the welfare state eroded. They now need to be reinvented rather
than restored -- indeed, radically reinvented.
Development priorities must not be formulated by financial elites or by government bureaucracies. Porto Alegre represents
the rise of global civil society that is seeking to make its voice heard.
Despite the differences and disagreements between radicals and moderates, they need each other. What unites the Porto
Alegre crowd is not just the "Another world is possible" slogan, it is also a general feeling that the existing world is
unacceptable.
The economic dogmas of the 1990s are being questioned globally and new ideas are needed. Another world is not
necessarily going to be a better place, but this very much depends on us.
The capacity of today's popular movements to change things will be tested in the near future. However, it is thanks to the
popular mobilizations of the past that we now have parliaments, electoral rights and political democracy. This offers hope that
economic democracy is also a possibility.
///////////////////////
Magic Realism for Real?
Boris Kagarlitsky - TNI Fellow
The Moscow Times, 12 February 2002
On this trip to Latin America, I finally grasped the meaning of magic realism.
The World Social Forum consisted of a huge number of events taking place simultaneously all over the city of Porto Alegre in
Brazil. The program of seminars and conferences was laid out in a 150-page bilingual directory. But the morning sessions
began at different times, depending on what language you spoke. Things got under way at 8 a.m. in Portuguese and at 8.30
a.m. in English.
"You know the Brazilians," a local participant explained. "If you print the right time, they'll show up an hour later."
All the same, everything shut down at noon, when the translators left their booths and went home for their siesta.
An acquaintance of mine from Moscow promised to call my hotel room one morning before picking me up to visit the Forum's
camp for young people. When he didn't call, I went down to the front desk, where I learned that my compatriot was not to
blame. He had been diligently calling all morning, and the receptionist had just as diligently been connecting him with the
wrong room, then conscientiously leaving me messages when I failed to pick up the phone.
By the time I sorted things out, I was late. I had no choice but to hop in a taxi and get to the camp on my own. I had to find my
compatriot in any case, because we had a meeting with Scandinavian colleagues that evening. The taxi driver, however,
mistakenly proceeded to take me to the university campus.
When it became clear that I wouldn't make it to the youth camp, I began wandering through the bookstalls of the radical
publishing houses. And wouldn't you know it, I ran into the very compatriot I was supposed to meet. He had also wound up in
the wrong place at the wrong time.
Or was it the right place after all?
My acquaintance couldn't catch a break that day. In the evening, his cabby was in a foul mood and drove him to the wrong
hotel. The first people he saw there were the Norwegians we were to meet and who had also been delivered to the hotel by
mistake.
Or was it by design?
This is evidently the secret of Latin America's vitality: Nothing goes as planned, but everything turns out all right in the end.
We will have an opportunity to test this observation in the fall, when Brazil holds presidential elections. This is why my
strongest impression from the Forum was produced by Luis Ignacio Lula da Silva, the Workers' Party candidate. When I saw
Lula, as he is better known among Brazilians, he was making his way through a throng at the main market, surrounded by
supporters, gawkers and tourists. His supporters chanted slogans like soccer fans in the terraces. People were constantly
trying to get their picture taken with him, or failing that to touch the national hero on the cheek or tug on his beard. The
candidate smiled a perplexed smile as he tried to reach a cheap restaurant where the mayor and the governor were waiting.
The Workers' Party owes its current popularity to general disillusionment with neo-liberalism. The liberal government's victory
over inflation proved ephemeral, but the price paid by the Brazilian people has been all too real. When the ruble collapsed in
1998, it was obvious that the real and the Argentine peso would follow. The Brazilian government deserves credit for not
waiting until the last minute to devalue the real, flouting the advice of the International Monetary Fund. Unfortunately, when the
real fell, it dragged down with it the reputations of President Fernando Cardoso and his Social Democratic Party. Lula likes to
remind people that his party always opposed the introduction of the new currency, but the upcoming election presents him
with a difficult problem. After devaluation of the real, Brazilians were quick to remember what it had cost to stabilize their
currency in the first place. They will look to the victor in this year's election to solve a host of social problems and to root out
corruption. At the same time, however, inflation cannot be allowed to run wild.
While Lula was mingling with supporters, Russia's leaders prudently chose heavily guarded New York hotels over meetings
with Latin American activists. And yet Russia, with its oligarchical economy, looks more like Latin America every day. Theft is
just as rampant here, but for some reason we have snow on the ground all winter and no carnivals. We also have no
protesters and no opposition. No one tugs our politicians by the beard or heaves cream pies in their faces. There's no joking
around with them.
That's simply not in our character.
Copyright 2002 The Moscow Times --------------